Written exclusively for InTouch Capital Markets
3rd April 2018
By Steven K. Beckner
Although he lacks the hands-on financial markets experience some might have liked to see, it is difficult to imagine a better choice to succeed William Dudley as president of the New York Federal Reserve Bank than John Williams.
Williams, who has been president of the San Francisco Fed since succeeding Janet Yellen in March 2011, will bring a deep understanding of the macroeconomy and monetary policy to one of the three most important jobs in the Federal Reserve system. A respected monetary theoretician and practitioner, Williams will give new Fed Chairman Jerome Powell, a non-economist, vital advice and support during a critical policymaking period.
Williams had been under consideration to replace Stanley Fischer as Fed Vice Chairman, but the New York Fed got to him first. He will leave the San Francisco Fed as of June 18 to fill Dudley’s shoes.
His selection comes as something of a relief to those who feared the New York Fed board of directors might venture outside of traditional monetary circles to choose its next leader.
Williams, who earned his PhD in Economics under the tutelage of John Taylor at Stanford University, lacks direct experience in banking or financial markets, and that’s a bit unfortunate since one of the New York Fed chiefs main tasks is to supervise the biggest financial institutions. But he has abundant credentials as a central banker.
Before becoming San Francisco Fed president seven years ago, he served for nine years as Yellen’s director of research before she left to become Fed Chairman. Prior to that, he was a senior Federal Reserve Boarfd staffer. They don’t come any more steeped in the workings of the Fed than Williams.
Williams has been in the forefront of monetary thinking, having done extensive research on the real equilibrium interest rate (r*) and policymaking at the zero lower bound.
His record shows an open-minded willingness to change his policy views in light of changing circumstances. After being considered an ultra-dove who advocated keeping the funds rate near zero for six years long after the financial crisis, he helped lead the way toward rate normalization. In early December 2014 — more than a year before the FOMC started raising the funds rate after six years near zero — he told me “mid-2015” was “a reasonable guess” for “lift-off.”
In January of 2014, seven months after Ben Bernanke set off the “taper tantrum” by hinting at reduced bond buying and less than a month after the FOMC actually began trimming bond purchases, Williams said, “assuming the economic recovery plays out as we expect, we will likely continue to reduce the pace of those purchases, and eventually eliminate them, over this year.”
Williams has continued to support monetary tightening to “prevent our economy from overheating.” Last April, Williams said he wouldn’t rule out raising the funds rate more than three times in 2017.
At the same time, Williams has argued the decline in the neutral rate portends more frequent visits to the zero lower bound and to the use of “unconventional” monetary policy tools like large-scale asset purchases and “forward guidance.”
With Williams’ off the table, it is hoped the White House will soon name Fischer’s successor as vice chairman. Unconfirmed reports have Columbia University economics professor and PIMCO managing director Richard Clarida in the lead for that key job. Others known to have been interviewed include former Fed Governor and top George W. Bush advisor Lawrence Lindsey.
Williams, who had rotated into voting position on the Federal Open Market Committee this year, will have a perennial vote on the Fed’s rate-setting body when he becomes New York Fed President. Until his successor is named, Williams’ seat at the FOMC table will be taken by San Francisco Fed first vice president and chief operating officer Mark Gould.